NetApp (NTAP) Bearish Play With an 8 to 1 Payout Into Tonight’s Print…..Plus Bonus Bearish IBM Structure

by Dan May 25, 2011 1:01 pm • Commentary

Update May 25th, 2011 @ 1:34pm: see IBM July Put Spread Below

NTAP reports tonight after the close….Options market is implying about a 6% move which is basically inline with the 8 qtr average move of about 6.25%

-stock is down 6.15% ytd vs the Nasdaq which is up 3.85% ytd….Interestingly the stock is currently down about 15% from the 52 week high it made in February and up about 15% from the ~9 month low back in March.

-street is fairly mixed with 20 Buys and 18 Holds….

-Short interest has picked up in the last few weeks to almost 5.5% of the float.

From Credit Suisse’s quarterly preview to clients:

We expect FQ4results to be in-line to slightly ahead of our revenue/EPS of forecast$1.380bn/$0.52 and consensus of $1.385bn/$0.53. Recent channel checks suggest above seasonal storage market growth and solid NetApp product momentum.

Healthy near-term trends into the July quarter. Recent checks with North American VARs suggest solid near-term growth and the resolution of supply chain/component constraint issues that plagued NetApp last quarter.  Further, despite some instances of aggressive pricing actions from EMC in CQ1 mainly owing to product transitions, NetApp discounting appears to have remained within normal bounds. As such, we remain comfortable with our 65.1% GM estimate for FQ4.

Outlook and valuation. We believe NetApp is well positioned to outgrow the broader storage market (8% storage CAGR LT) given 70% revenue exposure to the faster-growing mid-range segment (13% CAGR). While we expect this to drive healthy revenue growth, we expect ongoing spending will result in limited margin leverage and earnings momentum. While a premium
multiple is warranted for NetApp’s growth, our TP of $54 already implies a P/E of 19x our new CY12 EPS of $2.86. We retain our Neutral rating.

MY VIEW: Stock trades ok relative to some storage peers….company guided q1 down when they reported in Feb and the stock was punished a bit, would be hard pressed to think they miss that lowered guidance.

-in March the company bought LSI’s external storage business for about $500 million  in cash and the market didn’t like it…..sending the stock to 5 month lows….

-any wiff of weak guidance for q2/q3 and the stock will test the recent lows near 45……

-stock expensive to peer group trading at 25x next years earnings that are only expected to grow at about 12%…..

I want to look at a low premium way to play this into earnings….

TRADE: NTAP ($52.07) BUY June 50/48/46 Put Fly for .22

-Buy 1 June 50 Put for 1.22

-Sell 2 June 48 Puts at 1.44 (.72 each)

-Buy 1 June 46 Puts for .43

Break-evens On June Expiration:

-50 or higher lose .22

-btwn 49.78 and 48 make up to 1.78

-at 48 make 1.78 (8x your money)

-btwn 48 and 46 you payout trails off

-46 or lower lose .22


IBM TRADE: stock has massively outperformed all major indexes up 16% ytd….at some point over the next few weeks I believe the market will get hit hard and the weakness that we have seen amongst big tech losers like CSCO, HPQ, MSFT and AMAT will broaden out to names like IBM, ORCL and INTC as the market becomes aware that second half looks much weaker than originally expected…..see my comment regarding TECD yesterday as a potential canary in the coal mine…..

-Technically the chart looks heavy and I think the stock currently has a lot of good news priced into it……I am playing for a move back towards 160 prior to q2 earnings….

[caption id="attachment_2196" align="aligncenter" width="300" caption="6 month IBM chart Provided by Bloomberg LP"][/caption]

IBM ($167.75)  Buy July 165 / 160 Put Spread for 1.30

-Buy 1 July 165 Put for 3.05 and

-Sell 1 July 160 Put at 1.75

Break-Even on July Expiration:

Upside: above 165 lose 1.30 or less than 1% of the underlying

-btwn 165 and 163.70 lose up to 1.30

-btwn 163.70 and 160 make up to 1.30

-at or below 160 make 3.70